Preparing for inheritance properly can save considerable time and money for you and your family.
Inheritance tax is the levy which has to be paid on the estate that you leave behind when you pass away. The first £325,000 of your estate can transfer to your inheritors free of tax, but above that level assets are subject to a 40% tax.
Despite ongoing calls for reforms, the IHT threshold has been frozen at the current rate of £325,000 (which was set in 2009) until 2017/18. This is despite the fact that house prices have been climbing at staggering rates, particularly in property hotspots like London and the Southeast, meaning that more and more estates are being caught in the IHT net. The reality is that thousands may be sleepwalking into being hit with a 40% IHT bill.
The good news is that there are several perfectly legitimate strategies individuals can use to keep more of their hard-earned money in their family and ensure its financial security across generations. IHT is where the disciplines of investment management and financial planning intersect with the legal elements of wealth management, and as such can get quite complex. Inheritance tax planning is very much everyday business for full-service wealth managers, however, but you must ensure that your chosen firm has all the capabilities you require. A pure investment manager is unlikely to be able to offer IHT services per se, although they may be able to offer IHT-efficient investment portfolios.
The key to being able to fully leverage IHT mitigation strategies is to start planning well in advance. Nobody likes contemplating their own passing, or that of their loved ones, but taking the right steps now could make all the difference. The earlier you take advice the more planning options will be open to you and the more effective your wealth manager can be in deploying them.
How it works
There are several elements to a comprehensive IHT plan, but perhaps not all will be appropriate to your circumstances (and your ultimate intentions for your estate). The options below are all strategies which you might like to consider, however, and your wealth manager will be able to set out the pros and cons each entails.
(Details correct for the 2014/2015 tax year)
Provided they are both UK-domiciled, married couples can pass assets to each other without incurring IHT (or using up their own nil rate band). This means that if everything is left to one surviving spouse they can eventually leave an estate of up to £650,000 without incurring the 40% tax. However, the prevalence of “blended families” today does mean that professional advice is essential if your money is to be bequeathed completely in accordance with your wishes. A good wealth manager will help you prepare for all eventualities.
There are several types of investment which may qualify for IHT exemption when they are bequeathed because they come under the regime for business or agricultural property reliefs. Venture Capital Trusts and Enterprise Investment Schemes are well-established and popular ways to minimise IHT, since the exemption can kick in after just two years. Investors can now also hold AIM-listed shares in an ISA wrapper and these can also be bequeathed tax-free after being held for the same period. These kinds of tax efficient investments do tend to be riskier than traditional ones, however, and shouldn’t be entered into without proper advice.
It is possible to gift assets free of IHT, which has led some to simply give away their wealth to their loved ones while they are still alive. However, the donor must live on for seven years after the gift has been made or the tax can still apply. The rules also require that the assets are really given away too, so that you no longer benefit from them. Therefore, it’s not enough to nominally give away your house and keep on living in it; market rate rent would need to be paid to the recipient to keep within the rules. A good advisor will help you avoid common IHT pitfalls.
You could reduce the IHT liability on your estate from 40% to a lower rate of 36% if at least 10% of the total is left to charity. Many people will be looking to leave a legacy in any case, so the possibility of IHT mitigation may make a significant donation even more appealing. Some pretty complex calculations will apply when your estate is assessed, however, making it essential to consult an advisor with specialist tax expertise before making any serious decisions.
All of the strategies outlined above are commonly-used IHT minimisation techniques, but there are many other strategic “tweaks” your wealth manager will be able to make if leaving as much of your estate as possible to loved ones is your aim. However, it is vital that you don’t lose sight of your own financial needs in your desire to minimise IHT. People are living longer than ever today – often three or more decades after retiring – so you must balance the need to sustain your own lifestyle with your wishes for after you are gone. The objectivity and experience that a professional wealth manager brings to the table is invaluable here.
If you haven’t considered using a wealth manager before – or if you haven’t reviewed your existing manager to check their competitiveness and suitability – use findaWEALTHMANAGER.com to research and find your ideal wealth manager. Simply try our smart online tool. Or, if you would like to discuss your situation with our straight-talking team, please do get in touch here.